Focus: Insurance & Reinsurance – Insurance Contracts Act 1984 reform package announced
20 February 2007
In brief: On 12 February 2007, the Federal Government released the long-awaited exposure draft legislation and explanatory materials for public comment. The reform package implements most of the recommendations of the review of the Insurance Contracts Act 1984. Partner Dean Carrigan and Senior Associate Mark Lindfield summarise each part of the reform package.
How does it affect you?
- The reform of the Insurance Contracts Act 1984 (Cth) will affect all those involved in obtaining, arranging or providing the types of insurance to which the ICA applies. Overall, the reform package represents a refinement, rather than an overhaul, of the legislation.
- Written comments on the draft materials are sought by 23 March 2007.
Background
In September 2003, the Federal Department of Treasury commissioned a review of the Insurance Contracts Act 1984 (the ICA) led by Alan Cameron AM and Nancy Milne (the Review Panel). The purpose of the review was to recommend improvements to the ICA's operation by correcting deficiencies and clarifying ambiguities in its operation. The Review Panel reported its recommendations in two stages. The first report was concerned with section 54 of the ICA because ministerial meetings held in 2003 had considered the effect of then recent judicial interpretation of that section on the pricing and availability of professional indemnity insurance. The Review Panel's first report was released in November 2003 and its report on the other sections of the ICA was released in March 2004.
After stakeholder consultation, the Review Panel's final report, containing its recommendations for reform, was released in January 2005. The Federal Government announced that it would prepare draft legislation to address the review's main recommendations.
More detail on the submissions made by stakeholders and on the final recommendations of the review can be found in our Annual Review of Insurance & Reinsurance Law 2003 and in our Annual Review of Insurance & Reinsurance Law 2004.
The reform package
The reform package comprises 11 principal areas of reform.
Scope and application
It is proposed that a breach of the duty of utmost good faith will constitute a breach of the ICA. Relevantly, this will enable the Australian Securities and Investments Commission (ASIC) to commence proceedings against an insurer on behalf of an insured and seek against the insurer various remedies that apply under the Corporations Act 2001 (Cth), including banning orders.
The duty of utmost good faith is also proposed to apply to third party beneficiaries, although this duty will only apply after the insurer and insured have entered into the insurance contract.
To overcome difficulties in interpretation, contracts of insurance that bundle one type of cover with another type of cover will be effectively 'unbundled' so that the ICA may apply to some parts of the cover but not to the parts that are exempt from the application of the ICA. However, this 'unbundling' will not apply to insurance contracts that combine compulsory workers' compensation cover with common law employers' liability cover as such contracts will be excluded in their entirety from the scope of the ICA. These reforms will have retrospective effect.
Contracts of marine insurance covering transportation by water of personal, domestic or household property will in future be regulated by the ICA and not by the Marine Insurance Act 1909 (Cth), as is presently the case. This will not take effect until at least one year after the reforms become law.
The ICA expressly applies to insurance contracts the proper law of which is an Australian state or territory. To clarify the territorial and jurisdictional reach of the ICA, it is intended that the ICA will apply to future insurance contracts that cover Australian insureds or Australian risks, regardless of the location of the insurer or the place the policy is entered into. That is, the ICA will apply unequivocally to Australian policies issued by so-called direct offshore foreign insurers. The ICA will also apply to contracts covering the risk of loss or damage occurring in a state or territory to which the ICA extends. A six-month transition period is proposed.
Electronic communication
In order to bring the ICA into line with other areas of modern commerce, it will be possible for insureds and insurers to send to each other electronically (such as by email) notices required by the ICA. Some conditions will apply, such as the need to ensure that electronic communications can be copied and stored. Proposed regulations will impose additional requirements on such notices. These changes will apply to insurance contracts entered into six months after the legislation commences.
Powers of ASIC
ASIC will be given the statutory right to intervene in future proceedings concerning matters arising under the ICA, which is similar to the power ASIC now has under the Corporations Act. This reform will not affect proceedings commenced before the reforms become law.
Disclosure and misrepresentations
There is a proposed clarification of the factors to which a court may have regard when determining whether an insured complied with their duty of disclosure to an insurer. A non-exhaustive list of factors will be included in the ICA so that it will be clear, for example, that one step in deciding whether the duty has been met is to consider the class of persons to whom insurance of that kind is usually provided. This reform will apply to all past, present and future insurance contracts to which the ICA applies.
A different disclosure regime applies to some insurance contracts, which are referred to as 'eligible contracts of insurance', when they are first entered into but the standard disclosure regime applies on renewal. This is intended to be reformed so that renewals or variations of eligible contracts will be treated in the same way as new applications. Insurers will also be prevented from posing 'catch-all' questions and must instead ask only specific questions.
There is also a new obligation imposed on insurers that requires them to remind intending insureds that their duty of disclosure continues until they enter into a contract of insurance. This is intended to address the possible lag that may exist between the time the insured makes their disclosure to the insurer and the time at which the contract of insurance is formally entered into, which may be some considerable time later.
In relation to life insurance, the duty of disclosure is proposed to be extended to life insureds (who are not the insured party under the contract of life insurance but who propose to be covered under such a policy) and, for that reason, life insurers will be required to notify life insureds of the nature and extent of that duty. In addition, life insurers will receive additional protection in the event of misrepresentation or non-disclosure by a life insured who is not a party to the life insurance contract.
All of the reforms relating to disclosure and misrepresentation will be subject to a one-year transition period.
Non-standard provisions
The reform package will repeal and replace the existing duty imposed on an insurer to inform an intending insured 'clearly' about non-standard or unusual provisions in the insurance contract. Instead, the obligation imposed on the insurer will be to disclose those provisions in a 'clear, concise and effective manner', which reflects the disclosure obligations imposed by the Corporations Act on issuers of financial products, including insurance, to retail clients. A transition period of at least two years is proposed for this reform.
Remedies of the parties
The ICA currently provides that a party cannot rely on a clause of an insurance contract if to do so would be in breach of that party's duty of utmost good faith to another party. However, this will be extended so that it prevents relying on a clause of an insurance contract, as well as relying on a provision of the ICA. In other words, the duty of utmost good faith will prevail over the insurance contract and the ICA. This reform will apply immediately once the package becomes law.
Remedies of the life insurer
Contracts of life insurance entered into in future and which provide cover for more than one kind of insurance (eg death cover and income protection cover) will be 'unbundled' so that insurers' remedies for non-disclosure and misrepresentation will apply to each component as if it was a separate policy.
Life insurance policies that do not provide cover on death or that do not have a surrender value will, after a one-year transition period, be treated in the same way as general insurance if the insured failed to comply with the duty of disclosure or made a misrepresentation to the insurer before the contract was entered into.
Some other legislative amendments are proposed that will modify the remedies available to life insurers in the event of non-disclosure or misrepresentation. Going forward, a life insurer may avoid a contract only if the insurer would not have entered into the particular contract (as opposed to the current standard of any contract) if the non-disclosure or misrepresentation had been known to the insurer. Where a date of birth has been misstated by an insured, the insurer may adjust the expiry date of the policy.
Restrictions on insurers' rights
If an insured fraudulently fails to disclose or misrepresents a fact to an insurer, the insurer may avoid the contract or reduce its liability to nil. A court may grant relief to an insured, however, if the outcome to the insured would otherwise be harsh and unfair. It is now proposed that this relief may also be granted by a court where the insured's non-disclosure or misrepresentation is innocent. A one-year transition period is proposed for this reform.
A statutory automatic extension to the policy may come into effect by operation of the ICA where an insurer fails to provide notice of expiry to an existing insured as required by the ICA. Six months after the package becomes law, the ICA will provide that the premium payable for this statutory policy, in the event that a claim is made under the extended policy, will be a full premium and not a pro rata premium, as the ICA currently provides.
Third parties
Third party beneficiaries will obtain certain new rights currently afforded to named insureds, such as the right to notify, before the end of the policy period, facts and circumstances that may lead to a claim. They will also have the right to require the insurer to inform them whether a liability policy responds to a claim and whether the insurer will defend the claim. These reforms will commence after one year.
In defending an action by a third party beneficiary, an insurer will be entitled to raise defences relating to the conduct of the insured, whether that conduct occurred before or after the contract was entered into. A one-year transition period is proposed for this reform.
In relation to life insurance, third party beneficiaries who have the benefit of life insurance that is effected over the life of another person will be entitled to bring an action against the life insurer without the intervention of the policyholder. They will also have the same obligations to the insurer as if they were the insured, including the duty of utmost good faith. A one-year transition period will also apply to these reforms.
If an insured or a third party beneficiary is liable in damages to another person and is insured, then if they die or cannot be found, or if judgment cannot be executed against them, then the other person will, one year after the reforms become law, be able to recover from the insurer an amount equal to the insurer's liability to the insured under the insurance contract in respect of the particular claim.
Some additional reforms are proposed so that insurers under group life insurance schemes are not prejudiced merely because an insured's misrepresentation is taken to occur after the date of the insurance contract. After a one-year transition period, this will benefit insurers of group life covers including, but not limited to, those taken out in connection with superannuation schemes.
Subrogation
New rules will, six months after commencement of the reforms, replace the existing rules relating to the allocation of sums that are recovered through subrogated actions by insurers. The method of allocating those sums will be subject to any agreement between the parties to the contrary.
Unless otherwise agreed, the cost of taking the recovery action will first be deducted from the amount recovered and be paid to the party who funded it (or shared proportionately if both the insurer and insured contributed). If the insurer funded the recovery action, the insurer will then recover the amount of claims payments made under its policy and then the insured will recover any further amount necessary to recover the full amount of its loss from either the insurer or a liable third party. This order is reversed, however, if the insured funded the recovery action and, if both parties shared the costs of the recovery action, then a pro rata apportionment applies. Any balance remaining is to be divided between the insurer and insured in proportion to their contribution to the administrative and legal costs of the recovery action. Finally, any interest component will be divided fairly between the parties having regard to the amounts each recovered and the time each spent without the use of funds.
Third party beneficiaries will be treated as named insureds for the purposes of these reforms.
Claims made, and claims made and notified policies
The final part of the reform package affects 'claims made and notified' policies. A new definition of 'claims made and notified' policies is inserted. The new regime allows insureds a statutory extended reporting period of 28 days after the expiry of the policy period in which to notify the insurer of facts that might give rise to a claim. However, this only applies to facts that arose during the policy period. In addition, at least 14 days before a 'claims made and notified' policy expires, an insurer must inform the insured of the consequences of failing to notify facts that might give rise to a claim.
The 28-day extended reporting period also applies where an insurer cancels an insurance policy.
These reforms will not commence until 28 days after the reforms become law.
Conclusion
The reforms contained in the package may remove some of the inconsistencies and ambiguities that have arisen over the past two decades since the ICA became law. In that time, developments in the insurance industry and trends in judicial interpretation have meant that some provisions of the ICA are no longer having the effect that was originally intended. The reform package goes some way toward addressing concerns expressed by insurers, insureds and intermediaries in that regard. It is not, however, a complete overhaul of the legislation and no doubt some ambiguities and inconsistencies will remain. The real test for the package will come once its reforms begin to be applied and tested. Its success will be measured by the extent to which it resolves existing concerns without creating new ones.
Treasury invites comments on the reform package and draft legislation, which can be made until 23 March 2007.
The draft regulation impact statement released as part of the package seeks particular comment on a range of specifically identified issues. The Commonwealth Government has identified the amending Bill in the list of legislation proposed for introduction in the autumn 2007 sittings. We will monitor the public consultation process, the introduction and passage of the Bill through parliament.
For further information, please contact:
- Louise JenkinsPartner,
Melbourne
Ph: +61 3 9613 8785
Louise.Jenkins@allens.com.au